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How To Start Investing In Your 30’s. It’s Easier Than You Think!

How To Start Investing In Your 30’s. It’s Easier Than You Think!

Investing can be daunting for individuals. Often there are so many questions that go through your head. Am I saving enough? Can I save enough? What should I be investing in? Am I doomed to be broke forever? Can’t I start investing later?

I know, because I have been there.  My goal is to help bring some clarity around investing and to help guide you down the right path to becoming financially secure or financially independent, depending on your goals.

I have found many people don’t believe they can save the amount of money financial advisors tell them they need at retirement.  Have you ever worked with a financial professional and had them tell you your retirement goal number?  Was it $1M?  Maybe $2M?  And that is just to live the same lifestyle you have right now.

Well, as humans, we are creatures of habit – if you haven’t been saving then it’s hard to start, especially with such daunting numbers. But as the adage goes,  “How do you eat an elephant? One bite at a time.”

Getting Started

So, my goal here today is simple.  I want you to start thinking about your future.  If you’re in your 30’s, you’ve probably already experienced a multitude of life events.  Maybe you’re married or just getting married. Perhaps you’re having your first child. Perhaps you’re on your fourth.  Did you just buy a new house?

These are all stressors that can weigh on your shoulders.  This becomes especially true when you look at the future and figure out how much money you need to set aside for retirement. 

If you haven’t started saving yet, don’t stress.  It is easy to start running down the rabbit hole of the should have/could have.  Anyone can play armchair quarterback on Monday morning – hindsight is 20/20. 

As the saying goes, the best time to start was 20 years ago.  The next best time to start is today.

Now, let us talk about where you need to start before we move on.

Building Up An Emergency Fund

We must all start somewhere.  If you don’t have an emergency fund already set up and you’re in your 30’s, we will remedy this today.

Over a third of Americans average less than $1,000 in their savings, and their average monthly expenses are over $5,000.  That isn’t enough to protect you when things go wrong, and we found that out pretty quickly with this pandemic.  I’m not here to judge anyone with where they are, but I want to make sure you’re safe.

If you haven’t saved anything into a secondary savings account, that is where we need to start.  We must create your emergency fund before we can jump into the fun stuff like saving money and growing it to massive amounts.  If you get a flat tire, or your furnace goes out, or the house floods, you need to be able to handle those emergencies without going into credit card debt.

First Steps

The very first and most crucial step is this: make sure you have at least $1,000 in a savings account.  If you’re already there, that is awesome, and I’m super proud of you!  This is the starting point.  If you don’t have $1,000 to put into an emergency account today, that is ok. This is a work in progress and we’ll get you there!

If you can only save $10 a month, you need to be putting that aside until you reach your goal, and don’t forget to reward yourself along the way.  Celebrate the small victories on your way to taking control of your financial life.

Now, if you have debt, jump to Emergency Fund: Phase Two.  If you don’t have debt, or you’ve already paid that debt off, we have another goal for you.  This is when the hefty emergency fund comes into play.  If you’ve paid off your debt and you have your $1,000 saved up, you need to take a look at what your monthly expenses are

Tackling Debt

Debt is scary and it can keep you up at night, sick with worry, uncertain of how you’re going to pay your bills.  Debt is the chain that keeps you tied, not just to your job but the system.  Our entire economy is debt-centered, and it is what makes our world go around.

You have both good debt and bad debt, and the bulk of us only acquire more and more bad debts.  It doesn’t matter if you max out your credit cards.  Maybe you buy a brand new, expensive car.  You purchase the house at the top of your budget.  Regardless, we spend hundreds or thousands of dollars eating out with food that doesn’t even leave us feeling good.

Tackling Debt Through Debt Snowball

Debt is the problem we need to cure.  I’ve talked about how to get out of debt via the debt snowball or debt avalanche method, but I will highlight it here as well.  To get out of debt, you need to start paying off the credit card with the lowest balance.

It doesn’t matter if you only have one credit card or ten.  When you’ve paid off the one with the lowest balance follow these steps: once you’ve paid off your smallest credit card, add that payment to your next smallest credit card, and so forth, until all your credit card debt has been paid off.

If you have other debt, like a car payment or personal loan, then use the proceeds from the paid-off credit cards to pay these debts off next.  When you get to the point that you only have a mortgage, you will feel so much more confident. You’re going to need a significantly smaller emergency fund, and you’ll be ready to tackle any challenge.

When you’ve paid off your debt, you’re onto phase two of the emergency fund! Also, congratulations.  That is a significant step, and I’m super proud of you.

Emergency Fund: Phase Two

When you have calculated your expenses, add them up.  If you’re single, you need to create a safety cushion of 6 months of expenses.  If you are married and you both are working, you need to build a three-month cushion to keep you afloat if you or your partner happen to lose your source of income.

The need to have this type of emergency fund became very apparent in 2020 when we saw massive layoffs, myself included.  I don’t want you stressed out and worrying about how you will make it from one day to the next because your only income source has been lost. 

So, let us avoid all of that by building up that savings account now.  If you never have to use it, that is amazing, as you’ll never have to replenish it.  But this is your safety net to get rid of your fear, worry, and anxiety.

How And When Should I Start Investing?

If you haven’t started investing yet, that is alright.   I want you to get started today.  The goal is that you need to start paying yourself first.

You’re probably thinking, “Renae, you’re crazy.  I work all day to get paid.  I AM paying myself first.”  I hate to break it to you, but you’re not.  You’re working to pay all of your bills, and this is the mindset we need to shift.

When you get paid, I want you to put 10% away into a savings or investment account.  This is what you’re going to use to help build up that emergency fund to begin with.  You would never put off repaying someone else, so you shouldn’t put off paying yourself.

If you weren’t hustling every day, every week, every month, and every year, you wouldn’t get your paycheck.  Take care of yourself first.  Cool?

Should You Invest In Your 401k?

Now, if you work for a company that offers a 401k, this is where we are going to start investing.  You typically have two types of 401ks.  You have a regular 401k and a Roth 401k. 

I am a massive fan of a Roth 401k.  Different people will tell you how to maximize your retirement income, but I don’t want to complicate it, so here is how each works.

If you’re in a traditional 401k and contribute $10,000 for the year, you can deduct that from your taxes this year.  In the future, any withdrawals you make after the age of 59 and ½ would come out as ordinary income.  I never felt that the tax advantages today made up for the delayed gratification of the Roth.

So how does a Roth 401k work?  If you contribute $10,000 this year in a Roth 401k, you don’t get the benefit of deducting it from your taxes this year.  However, when you start taking distributions after 59 1/2, you get it 100% tax-free.  If that grows to over $1,000,000, then you can take the whole amount and keep it all in your pocket without letting Uncle Sam get his hands on it.

Time Is Your Friend

See how powerful that can be?  If that were ordinary income, you would lose about 50% of the whole amount.  The younger you are, the more impactful the compound effect has on your investments.  If you start at 30 years old and plan to retire at 67, the current age for full social security gives you 37 years of investment growth.

If you start at 39, then you have 28 years left to invest before you retire.  Either way, this gives you a significant bit of time to start socking away cash for your future.  Now, we’re getting a little bit ahead of ourselves with this.  You’re still wondering, where should I start?

When you are working with a 401k, you want to put away at the minimum, the amount your company will match.  So, if you invest 8% and your company will match you 6%, do that.  This automatically gives you a 14% savings rate.  Not bad, huh?  The other 2% can either help you build your emergency fund or help you pay down any debt you have.

If you can’t get to that point today, that is okay as well.  Start with 1% if that is all you can afford to do.  The fact is, you need to get started.  If you start with a small amount, set it up inside your 401k to automatically increase your annual contribution by 1% each year.  It is a small enough amount that you won’t notice it, and it will help when you get pay raises to invest more.

10%, And No Debt, Now What?

You’re looking at your net worth now. You realize you have managed to not only start saving some money and putting it to work for you in the market; you have also gotten out of debt and freed up some cash flow.  That is awesome, and I’m super proud of you.  Here is what you want to do next.

If you can invest in a Roth IRA for you and your spouse, you should max that out.  Right now, if you are below the age of 50, you can contribute $6,000. If you are age 50 or older, then you are allowed a $1,000 catch-up provision so you can put away $7,000 for you and your spouse.  If you want more information about how these work, check out this article here.   

Roth IRA or Taxable IRA?

If you make too much to invest in a Roth IRA, then you should look at investing in a Taxable IRA. In essence, there is no real income limit for a taxable IRA.  You don’t get the tax benefits of it. The way around the lack of tax benefits is to immediately roll that into a Roth IRA and pay any taxes on the gains you’ve acquired.  This is called a backdoor Roth. 

Not all broker-dealers allow this transaction, so if you’re in the higher income threshold, talk to a tax consultant or a financial advisor for more information. 

When you can max out your IRAs and have more cash available, you can then look at maxing out your 401ks.  This allows you to put away an additional $19,000 a year alongside the IRA.  You can see how the amount of money you invest can quickly add up.

Think About Adding An HSA

If you still have more assets available for investing and you are in good health, you can look at maxing out an HSA.  I will dive deeper into this in another post.  Essentially it works like this.  You max out how much you can put into this account; after it reaches a specific limit, you can invest this into the market.

As you keep putting more and more cash into it, usually with a portion of it being matched by your employer, you let it grow.  When you go to the store and buy anything health-related, such as medicine, Tylenol, Nyquil, or co-pays for doctor visits, you put those receipts away in a folder to keep.

When you’re ready to dip into those funds in retirement, you put it against all of the receipts you’ve saved up over the years.  The original funds were invested pre-tax.  They grew tax-deferred, and if you kept the receipts like you were supposed to, you could use the receipts to take the cash out and pay yourself back, tax-free.

What You Should Aspire To Get To

If you’ve been able to do all of what was suggested above, you’ve made it.  If you still have more assets to invest with, I applaud you.  I am also incredibly proud of you.  You can take those assets and invest them in a non-qualified brokerage account.  It is in a brokerage account that you can start investing in stocks and bonds.

Hold the investment for more than a year. You can take advantage of long-term capital gains taxes instead of paying ordinary income tax.  Again, speak with a tax consultant or financial advisor if you want to know more about this.  There is also a way to maximize your income with non-qualified funds by maxing out dividends and interest. If you are married, you could earn up to 80,000 in capital gains each year tax-free and then use that to step up your cost basis.  This is something that we will discuss more in-depth in a future post.

Final Thoughts

I know that we’ve touched on a lot here.  We took you from having no emergency fund to building up an immediate reserve.  We talked about how to start paying yourself first by putting away 10%.  Eventually, we want that number to get to 20%, if not 40%.  This isn’t going to be easy, I know.  It will take a lot of grit and hard work, but I believe you can do it.

We also talked about how to invest in your 401k, IRA’s, HSAs, and non-qualified brokerage accounts.  Suppose you can start implementing these various strategies. In that case, you are well on your way to Financial Independence and Retiring Early (FIRE), or what we like to call Fat FIRE.  In this article, you can see how Bogleheads set up their portfolio.  There is also an example of the All-Weather Portfolio that Ray Dalio talks about.

As always, thank you for your time.  If you have any comments or questions, leave a message below.

Stay Happy.

Disclaimer: Just My Little Mess does not provide tax, investment, or financial services and advice. The information is presented without considering the investment objectives, risk tolerance, or financial circumstances of any specific investor. It might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.